What to do about the state’s B&O tax and various preferences
The Everett Herald ran our op-ed yesterday calling for a Single Business Tax to eventually replace the current Business and Occupation Tax (B&O). From the op-ed:
WPC analysts used economic modeling to determine the impacts of various B&O replacement taxes on a revenue neutral basis. Any repeal of tax preferences should follow sound principles of taxation (such as simplification and transparency) -- not simply take more money from businesses for government spending.
Not surprisingly, economic models showed a state income tax to be the worst policy, causing the most job loss and economic distortion. With other options showing minimal job or economic impact, we turned to meaningful reform based on sound principles of taxation. These principles include tax-code building blocks such as simplicity, accountability, economic neutrality, competitiveness, balance and reliability. The result is our recommendation to replace the B&O tax with a constitutionally-defined Single Business Tax (a gross receipts margins tax) that would be:
- Revenue neutral;
- Treat all business owners equally by using one flat rate;
- Eliminate all loopholes and special treatment;
- Eliminate favoritism by policymakers;
- Repeal all existing state and city business taxes;
- Centralize administration of the tax to reduce compliance costs for business.
Here is how the Single Business Tax would work. Each year business owners would choose one of three ways to calculate their taxable receipts, selecting the one that results in the lowest tax burden. Calculating the taxable margins would be based on the business':
- Total gross receipts minus labor costs, or;
- Total gross receipts minus all production costs except labor, or;
- 60 percent of total gross receipts.
The business owner would then multiply the taxable receipts by the Single Business Tax rate. Cities could levy their own business tax, but the same uniformity standard would apply -- any local business tax would have to be based on a single rate applied equally to all business owners, with no political favoritism. The final amount owed for each taxing jurisdiction would be sent to the state in one payment. State officials would then distribute the funds to different local governments.
This proposal would eliminate today's confusing multiple rates on business activities, repeal the special interest tax credits and exemptions that have built up over the years, and provide relief to small businesses with low profitability. The Single Business Tax would be phased in over several years to allow employers and public officials time to adjust to the new system.
By embracing solid tax principles and meaningful reform -- both in the short and long-term -- we can encourage future economic growth. We hope our proposed Single Business Tax will start a meaningful conversation about alternatives to the burdensome B&O tax and how to create a saner tax for our state's businesses, while providing funding for core functions of government.
In the meantime, the existing tax preference review process by the Citizen Commission should continue and the Legislature should consider its recommendations.
As for the current tax preference review process, the Joint Legislative Audit and Review Committee (JLARC) could be asked to group existing tax preferences into the following categories:
- Influence behavior (Example: RCW 82.08.963 - Solar energy equipment)
- Improve industry competitiveness (Example: RCW 82.08.02565 - Manufacturing machinery)
- Create or retain jobs (Example: RCW 82.04.4461 - Aerospace product development)
- Reduce double taxation/pyramiding (Example: RCW 82.04.440(2&3) - Multiple activities, instate)
- Direct financial assistance (Example: RCW 84.38.030 - Senior citizens tax deferral)
After tax preferences have been grouped into these categories, JLARC would identify those without explicit legislative intent or stated policy goal. JLARC would start the review in the category with the highest cumulative dollar amount. Before starting the next category review JLARC would submit a report to the legislature with the recommendation that the legislature adopt explicit intent/policy goal. For those with stated intent/policy goal JLARC would follow the current review process required in RCW 43.136.
Another potential reform in the short-term concerning the tax preference review process would be to require completion of a “Tax Preference Performance Statement” (like a fiscal note) before a hearing/vote can occur that answers these questions:
- What is the intended purpose?
- What are the performance measures to monitor success in achieving the intended purpose?
- Who actually benefits (direct/indirect)?
- What are the planning, record keeping, reporting, and other compliance costs for taxpayers in using the preference?
- Which of the 5 tax preference categories (mentioned above) does the preference fall in?
An electronic database could then be created that tracks reporting of key criteria (2-4) for those that claim tax preferences. New tax preference would then be subject to a JLARC performance review once every 10 years that answers the questions specified in RCW 43.136.055.
One final recommendation would be to create a tax transparency website modeled after the state’s searchable budget website fiscal.wa.gov. WPC worked with lawmakers in 2008 on the budget website bill. A previous bill to create a tax transparency website was proposed in 2009.
Replacing the Business and Occupation Tax with a Single Business
Principles of Taxation for Elected Officials
Washington Policy Center Proposes Tax Transparency Website